Banks in Greece received at the height of the debt crisis state aid for liquidity and capital support totalling 145 billion euro, reported Eurobank EFG. 90% of this aid came in the form of state guarantees for bond issues supported by other elements of their assets in order to obtain 125 billion euro funding from the European system. The two main reasons for the need of state aid to private banks in Greece are the debt crisis and the massive withdrawal of deposits from local banks, which is currently estimated at 75 billion euro.
Since the spring of 2010, Greek banks have been isolated from capital markets and the European Central Bank has remained the only source of liquidity. It has continued to accept Greek government bonds as part of the rescue programme of the country and in return, allocated funds to financial institutions to fill major holes. Like many other saving remedies, PSI (private sector involvement in the reduction of the Greek external debt) was a drug with dangerous side effects. The PSI has reduced the burden of public debt to 100 billion euro but it has also weakened the capital adequacy of banks. In February this year, with the triggering of the PSI process and the partial default of the country, the European Central Bank considered the Greek government bonds unacceptable. As a result, the funding for Greek banks fell from 73.37 billion euro in January to 48.84 billion euro in February. In March, the level of allocated resources reached 78 billion euro. Meanwhile, by the end of March, the financial system of Greece had received 46 billion euro from the fund for Emergency Liquidity Assistance (ELA).
After the weakening of the banks’ capital base due to the haircut of the nominal value of Greek bonds, the funding from the Emergency Liquidity Assistance reached 75 billion euro, reports Naftemporiki, and 55 billion euro from the European Central Bank.
Eurobank EFG stressed that it is not about real money, but mainly about state guarantees enabling banks to raise funds from the European Central Bank. The report also gives an answer to a question, which has often been heard in public policy debates lately, namely, why have banks invested such large amounts in government bonds, if the state proved to be an unstable and insecure investment.
The answer of the Greek financial sector is that banks have invested in state crediting not more than it is customary in other European countries. In particular, the percentage of investments in government bonds to total bank investments varies between 10% -12%. For comparison, the share of government securities in the portfolio of Spanish banks is 10% and 11% in Italian ones. In Portugal, it is 6%. The banking sector explained that until recently, government securities have been considered a zero risk investment, which explains the involvement of local banks in financing the state. Profits from state bonds were guaranteed before the global crisis. Subsequently, the European Central Bank started buying the securities at a reduced nominal value that exceeded 50% at the height of the debt crisis.
The economic collapse of Greece has crushed the capitalization of the financial sector in the country too. Greek media report that in 2007, the banking sector value on the Athens Stock Exchange was estimated at 80 billion euro. Five years later, it has fallen to 3.5 billion. Eurobank EFG stressed that in the period 2007-2011, bank shareholders were not receiving dividends but several times took part in the process of capital increase totalling 13.7 billion euro to strengthen the financial system.